Avoid the horror show, get a buy-sell arrangement done (part two)

December 21, 2014

In part one of this two part post, I wrote about buy-sell arrangements and how that will protect business partners against the unexpected death of one of their own. Circumstances that come with the death of a partner can vary, but in the end, surviving owners need to be concerned with people and entities that will have competing interests if such folks wind up with the the decedents ownership stake in the company.

In this part of the blog we will tackle what happens if a partner in a company becomes disabled. In an instance such as this, the dynamics change. In the event of a partners passing, co-owners would need to deal with outside parties. In the event of a disability, you’re not dealing with outside parties, you’re dealing with your cofounder or partner. This is going to change the way things are treated.

A disability to a co-owner can create some uncomfortable problems if the event is severe enough. What if such an event is bad enough that a co-owner can no longer work at all? Maybe worse than that, what if you have to break the news that while a partner may feel he or she is good to go, they just can pull the weight anymore?

To start, we will discuss the worst case scenario, a permanent disability that simply will not allow one to work in the business anymore. Over the course of one’s working career, the chances of suffering a disability versus the chances of dying are about 3.5 to 1. In your younger days, that ratio is higher and as you age that ratio decreases. Given the chances of such an occurrence, the need for disability as part of a buy/sell arrangement becomes pretty clear.

So what happens? In the event of total disability, the disability buy/sell arrangement will dictate a process, a valuation model and if done properly, a funding method using disability insurance to fund the buyout. Within a complete corporate buy/sell arrangement, there will be a component in the event that a disability that will not allow for a partner to continue in such a capacity. Should this occur, it would trigger the terms of a buyout per the terms of the arrangement. For funding purposes, disability buy/sell insurance coverage should be put in place in order to finance the arrangement. Without the insurance proceeds, one partner would have to either have cash on hand, or raise the funds independently to finance the buyout.

Short of that, what you have is one partner running a business with a second partner simply along for the ride. Not the scenario the partner running the show at that point would feel to be fair to him or her.

What if there is no total disability? What if it isn’t permanent and all parties feel that the owner will fully recover and be able to return to work? This is where Disability Key-Man coverage comes into play. This becomes the middle ground that will cover a company for the expenses incurred while a key person is out on disability. It should be tailored to sufficiently stabilize the company while determinations can be made regarding an employee return or ultimately replacing said key person. This issue is more complex than the brief description given here and will be explored more completely in a different blog post.

The disability recovery scenario is why most buyout triggers of a buy/sell agreement dictate that a partner be deemed totally disabled and that a long probationary, typically 12 months, be subject to the triggering of a buyout. A business owner will not be too quick to hand over a stake in a business if he or she were to believe that they will be able to recover from an incident. Quite frankly, a business owner may plain and simple never give up the stake regardless…unless there is a preset arrangement with parameters in place.

As a disabled owner, without a formal agreement there is nothing forcing the issue to trigger a buyout. A disabled owner could set their own price that a co-owner doesn’t agree with or is simply an unfair valuation. A disabled owner could go out in the open market and find another buyer to take over their stake if he were to find someone other than a co-owner to meet his price. Where does that leave the healthy partner? Without the arrangement set in stone, one could be looking at running the company essentially by himself, a new business partner, and if things come to a head, the disillusion of the company entirely.

It doesn’t need to happen and both parties owe it to themselves to get ahead of such things. When an instance such as a disability occurs and the potential impact of business becomes an issue, egos and feelings get involved, that helps no one. Take it out of the equation now.

For more information on the topic or guidance, use the form below or reach out directly to Nathan Therrien at 978-400-7014 or at nathan@bibsma.com

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4 types of insurance your startup is going to need.

December 18, 2014

Workers Compensation Insurance. Ok, this one is easy. The state pretty much mandates that you have this type of insurance coverage in place once you hire your first employee. It is going to be fairly inexpensive if you consider that you would only be paying for coverage on one employee or perhaps the owners of a company based on how the company is set up to start with.

General Liability. Most people will think of this as the ‘slip and fall’ insurance. It’s true, it is slip and fall insurance, but there is quite a bit more in there which is why general liability would be better described as your ’bread and butter’ insurance. This kind of coverage represents the foundation of protection for your company.

Aspects of this type of coverage include advertising and personal injury. This will cover you if you screw up some of your advertising at someone’s expense. You may slander someone or violate intellectual property such as trademarks or copyrights. Products and Completed Operations coverage is also part of General Liability. If you sell an actual product, this is where your coverage lies if that product were to fail, or if it injured someone. There is of course the ‘slip and fall’ scenario where someone walks in your office and takes a spill because someone dropped a coffee on the floor.

Most of the time, the trigger for this type of coverage for a startup will be a move into a commercial space or the need to settle up with a vendor contract.

Professional Liability. This is where you get a little more specialized. If you work in some kind of services arena or in a technical space, you will likely need this. Professional Liability coverage covers a firm if there was any sort of claim that stemmed from the normal operations of one’s business. Pretty much this is the coverage that would protect your company from damages that stem from a mistake made by you for work done for another party. If an insurance brokers screws up someone’s insurance, that is a mistake that stems from the normal day to day operation of the broker. The act was done within the confines of his or her profession.

This type of coverage extends to all aspects of services, doctors, lawyers, on and on. Technology has its own subset called Tech E&O which specializes coverage around that industry and its specific needs such a cyber and breach protections.

General Liability goes hand in hand with professional. If you only have one, you may have a big gap in your exposure.

Directors and Officers. This is a bit next level, but in this day and age it is becoming more and more of a requirement rather than an ancillary coverage. Directors and Officers coverage covers officers of a firm for damages that stem from actions taken as a matter of management of that firm. A good example is stakeholders of a company taking issue with a strategic direction. If the CEO does X instead of Y and a stakeholder is caused damage, that stakeholder can sue the company officer. Not the company mind you, the officer. That can leave a big personal exposure of you are not protected.

An important component that goes hand in hand with D&O coverage is EPLI (Employment Practices Liability Insurance). It’s become more and more common that lawsuits against company officers don’t come from the outside, they come internally from employees, or more to the point, former employees. Claims such as harassment, discrimination and retaliation are common causes of employment claims where an employee will file suit naming not only a company but also officers.

D&O coverage has become more and more necessary to insulate yourself as an officer of a company. Some feel they don’t need it or it will never happen to them or just don’t see the risk….they would be wrong. It’s a litigious word we live in. Don’t get hung out to dry.

If your a company that has reached any of these points and can use some guidance, feel free to reach out to us, we’re here to help. You can use the form below or contact Nathan Therrien directly at 978-400-7014 or by e-mail at nathan@bibsma.com

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Avoid the horror show, get a buy-sell arrangement done (part one)

December 2, 2014

Small business owners have enough on their mind, but some things just need to get taken care of. If you are an owner of a company with at least one partner, a buy-sell arrangement is one of those things. Buy-sell arrangements are the legally binding framework and roadmap to the divesting on an owners stake in a business depending on a variety of factors. For the purposes of this blog post we will be focusing primarily on the death of an owner.

One of the most important reasons to get a buy-sell arrangement done is to protect owners against a worst case scenario, the untimely death of a partner. It’s a tragic consequence when this occurs, and something that becomes a life altering event when it happens on a lot of levels. When it includes an ownership stake in a company with other partners, that consequence involves that many more people. It is unfortunate that such an event can trigger the dissolution of a company unless steps and a process are in place.

When such an occurrence takes place there is going to be an issue with the estate and heirs of the deceased owner. What comes next without a plan in place can be ugly, especially if the company does not have a set valuation process and means to fund a buyout. Without an arrangement, the owner’s stake is going to pass to the owners heirs or estate. Without an arrangement in place, surviving owners have a couple of options, neither good nor practical.

On one hand, the surviving owners can establish their own means of funding in order to buyout the deceased owner’s heirs. There are two problems here, first is whether the surviving owners can line up that kind of financing. Surviving owners will likely need to approach a bank in order to set up the kind of financing needed to accomplish such a buyout, this may not be easy in and of itself, but what if the owners have a certain value in mind and a deceased owners heirs disagree. Maybe the heirs think the company is worth more than surviving owner say, maybe the heirs think they are being taken for a ride. It’ll be an emotional time and no place to start throwing large numbers around.

Which brings us to the second impractical option, say hello to your new partners. Now maybe the heirs of an owner are knowledgeable, reasonable people who simply want to keep the stake intact and retain ownership passed onto them as a silent partner, best of a bad situation. Worse than that is a new owner who wants to come in a turn things upside down. The husband or wife who wants to start making all the decisions or the idiot know-it-all son or daughter. This is where things go from bad to worse and makes for an untenable situation.

Either one can lead to a forced liquidation of the company in time.

Avoid it…. avoid it all. A simple buy/sell arrangement can set in stone a means to value the company, and the means to finance it. Find a good attorney with experience in drafting such a document to see to it that all the issues are covered and that any unique circumstances related to your company will be attended to. From there, purchase life insurance policies to finance a buyout in the case the death of an owner. Such an occurrence will trigger the buyout based on an agreed upon valuation in the arrangement and insurance proceeds will be used to pay for a surviving heirs company stake. The share of the deceased owner will come back into the company and distributed amongst the surviving owner per the agreement.

It doesn’t cost much to get things done and it beats having to deal with the alternative. It becomes more important the more stakeholders there are because face it… things happen, the unexpected occurs and companies need to be prepared.

For more information on the topic or guidance, use the form below or reach out directly to Nathan Therrien at 978-400-7014 or at nathan@bibsma.com

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